Saturday, October 23, 2010

Social Security: To Draw or Not to Draw (too soon)

I am going to tell you right from the beginning: there is no easy answer for when to begin to draw your Social Security. But there are some things you can do to help make the decision easier. And if you have done your retirement planning homework (saved, invested, planned),  the decision will come as one of the many you have to make to as you approach this crossroad and if you have, it wil be much easier.

Drawing early is technically a bad move for a lot of people. It limits how much you can get monthly. Yet on the other hand, retiring at 62 years old is not an option for some. In this instance, the early retirement draw on Social Security usually suggests less optimism for a long life. If you have experienced a hard-scrabble career, one that was not done at a desk job, the lure of getting a little respite is often the only consideration. Knowing that you can still earn some additional income while drawing an early benefit is often a comfort to this group.

There is no denying that this decision is a highly personal one. And there is no right answer for everyone. But there are some things to consider. For instance, if you are going to be the first to retire in your household, and your spouse is eligible or capable of waiting until full retirement age (which could adjust your benefit slightly when they do), you should have a Roth IRA or a Roth 401(k) to get you through the lean years. This already-taxed account will help with the tax considerations - and there are many.

Taxes play a huge and significant role in your decision. You will definitely want to consult as well-recommended tax professional a year or two prior to retirement. They may advise a tax strategy that could net you a higher benefit (if you are drawing early, your benefit is based on the last and highest income year) and give you options for increasing that benefit through another sort of plan that is little heralded by the SSA: paying it all back.

This is done by paying your benefits back in full at your full retirement age to net the maximum allowable benefit. Retire at 62 and pay them back at 66 would require a payment of about $36,000 (based on the average payment of $750 a month for four years). This cash might come from the sale of a home, the lump sum payment of a 401(k) plan or simply from the Roth you have. It will however, close a $250 a month gap - which might be more than your Roth could guarantee.

Another potential consideration is how much you make in your final year of work. If it is your highest earning year, your benefit will be adjusted to reflect that income. You may be eligible for benefit increases when your spouse reaches retirement if their benefit (and this is also based on the decision of when you begin to draw your own benefits).

You could fund your Roth with those SS payments, withdraw the already taxed deposits and pay it back for the higher SS benefit. Rough calculations on this sort of move - remember, get tax help - could look something like this: $750 to your Roth taxed at 15% with a modest return of 5%; $36 returned to SSA with the investment return remaining in the Roth; taxes adjusted and the new higher benefit, which acts as a 25% return on the four years you invested/saved the money, works out to be a net profit for those that are able to do so.

But check with your tax person to see whether this is feasible or not.

Paul Petillo is the Managing Editor of and a fellow Boomer

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